Narrowing arbitrage: JB Beckett asks how should advisers navigate MPS in the Multiverse?’

by | Jun 13, 2024

For advisers and providers offering MPS, having enjoyed a lucrative light-touch environment devoid of the compliance burden of multi-asset funds, post consumer duty that time of easy arbitrage is ending, says JB Beckett.

In this fascinating insight and analysis, JB not only takes us on his personal journey through MPS and multi-asset but has also dusted down his crystal ball, sharing his thoughts on the outlook for these two investment approaches in today’s new Consumer Duty world. It’s well worth a read!

Following my having chaired an enjoyable second multi-asset webinar for IFA Magazine earlier this month, I thought it timely to take stock of where the whole Multi Asset Funds (MAF) versus Managed Portfolio Service (MPS) sector is heading. 

To begin, we know that, at least propositionally speaking anyway, blended adviser fund portfolios, Discretionary Fund Managers (DFMs), MPS and MAFs all sit pretty close together in what we might call an advised centralised proposition space. With that close proximity in adviser decision-making, they are prone to leech into each other’s business channels and compete for the same asset pools. This tends to branch between wholesale and workplace clients.

Spawned from fund buy-lists and Funds of Funds, more recently it is MPS that has been winning advisers over with MPS now over £100bn in size.  Whilst this is still small compared to Workplace offerings; we can see there was a clear synergy occurring between advice, platform and MPS. One that had worked well in the previous compliance environment. Many IFAs and DFMs had capitalised by entering the space, along with research firms and larger asset players like LGIM and Invesco. MPSs are now running close to a fifth of retail adviser assets according to Platforum.

Meanwhile, when I was still on the board of a U.K. fund boutique until 2022, I could see first-hand the influence MPS providers like Margetts had over IFA wholesale flows. Much in the same way that pension consultants’ buy lists influenced the workplace market.

In my life

To try and help you to better understand my views on MPS today, I feel that I need to give you a potted history of my own experience of MPS. Don’t worry – I’ll make it fairly brief!

I created my first MPS for my, then, IFA firm back in 2000. It is sobering to think that was nearly a quarter a century ago. Back then, I was a fresh-faced paraplanner/fund analyst keen to impress, someone who had moved over from compliance to support one of my advisers,  Tom Munro. I was creative, relatively bright (no comments please) but greener than a hard-marketed climate fund. It is fair to say that 2000 was an interesting time to get into asset allocation and fund selection.  

Having passed my Portfolio Performance Measurement module for the then Securities Institute, back then my humble wee MPS was based around a 100-strong fund buy list covering all sectors, monitored using Micropal’s website by keying the data into my proprietary Excel quant screen.

I created a 3 year strategic neutral, and active weights updated monthly, that ‘house view’ was based on a consensus informed by a panel of 8 well known fund managers and from which I designed and tested 22 models grouped into Adventurous, Balanced and Cautious risk budgets. This was all alien sci-fi stuff to my Board but I received timely validation from external contacts such as the likes of Chris Arnott and Andy Papadopolous. 

I included income-specific models and I weighted each portfolio with both alpha and beta funds to a desired expected CAPm outcome, matched to the annual needs based review of the adviser and client’s latest attitude to risk. I diversified portfolios by asset class, geography and industrial sector albeit I had not discovered factorial analysis back then. Each portfolio was also costed. I spent significant time negotiating fund fee costs at source with offshore and onshore bond and SIPP providers like Clerical Medical and Standard Life. I began to meet fund managers, follow established fund of fund managers, read OBSR and S&P reports and began to analyse portfolios. I was mixing active with beta funds, using TAA funds to provide some dynamic component and then working with the adviser to make sure the portfolio allocation was rebalanced during the adviser annual review, checking the needs review and cash flow analysis. Rudimentary certainly but still robust.

Also, the service was provided not as an additional cost to the advice fee but as part of, a way to validate taking trail commission on an annual basis. Looking back, it would have evidenced well against an annual product review, consumer duty or surprise FCA 41-point checklist. At the time, the firm took circa 30 basis points trail, annually. I was paid a modest salary. I was just 27. 

A different world – or is it?

That little MPS reached the giddy heights of only £14m. Pocket change to some but it was difficult time to grow business. In April 2000 the Dotcom bubble had burst, by September 2001 we went through 9/11. Then advisers were either in managed funds, bonds or split cap Investment Trusts (what a mess!). At the time MPS was still pretty novel and ultimately I was too soon to market.  Back then advisers bought broker funds, or well-known star managers off the back pages of the pinks. It was still a time of fund retrocession and convincing colleagues that, firstly, funds should be selected on other criteria or,secondly, that we could do better in allocating those funds, was an uphill struggle.  My key adviser, Tom Munro, however remained hugely supportive. 

Nonetheless, it was a tough first induction, the Board were unconvinced either in me or the concept, or both. This was quite ironic though, as technically I can look back and recognise they frankly had little investment understanding albeit a great grasp for commission.

Afterwards, I believe my MPS was replaced by a more systematic approach from SEI. By 2003, I had moved onto asset management, joining Franklin Templeton as a senior fund analyst, just as Brooks MacDonald launched its own MPS. Bitter sweet.

By today’s standards, my MPS sounds quite old fashioned; yet by the same virtue still comparable to many MPS we see today and shows just how little evolution has actually occurred and how much MPS lags multi-asset funds in process terms, despite the improvements in platform and portfolio technology.

The song remains the same?

For the next 10years I worked in fund analytics, product management, and investment propositions before returning to fund selection. Much has changed in the nearly 25yrs since my MPS but much has remained the same. As I discovered later at Lloyd’s in 2012. Having acquired a selection and governance remit over adviser and DFMs coming onto the Scottish Widows platform, I began to review MPS like I would the many hundreds of funds I oversaw. However, unlike funds, I was also getting hands-on by attending MPS/wealth committees and pushing through changes at the board level to improve processes. Adviser based and MPS propositions were, from my point of view, governance intensive especially to get them into shape at the start. Quality was highly variable and many fell short of even my humble MPS back in 2000.

The long and winding RDR

Today the IFA sector has changed greatly, particularly post Retail Distribution Review (RDR) that supposedly ended the commission-led value chain. Today, the advantages for advisers of MPS is to outsource investment decisions whilst retaining some control for clients, sceptically speaking we might note MPS offered a lucrative new profit centre for advisers, post RDR, to pivot their business from advice to wealth management. Today MPS is a £100bn business and has overtaken multi-asset funds for new inflows. There is a sense of bullishness, a sense of land grab with lower compliance costs compared to running multi-asset funds. Today MPS still sits in the periphery of the regulatory perimeter, a compliance parallel between fund management and advice, long overlooked by the value for money regime. 

Twist and shout

Today we are seeing new entrants and also market consolidation. Parmenion has expanded its discretionary fund management offering with the addition of investment model portfolios from PortfolioMetrix, Elston Portfolio Management and Quilter.

In terms of fees, we have seen a race to the bottom with low-cost disrupters, from Quilter’s, Tatton’s and Timeline’s MPSs. Vanguard’s multi-asset offering continues to compress costs. In fact, the drive for Evidence Based Investing and passive ETFs has very much played to the likes of Timeline, buoyed by the likes of the SPIVA report. NextWealth recently reported that the average price paid by end clients for an MPS in 2023 was 60 basis points (bps), according to the report, compared with 67bps in 2022. The previous year saw a more substantial drop in MPS fees, falling from 100bps to 67bps year-on-year. Hence your MPS pricing strategy needs to assume that downward trend will likely continue. Any inflection in active-passive MPS performance may be protracted and so unlikely to have any noticeable counter effect.

Tomorrow never knows

But, we’re in a new era. Tomorrow, the challenges with MPS may be traversed with technology. Rebalancing frequency and model-portfolio divergence are key. MPS has long suffered a lack of agility, fee opacity, vague regulatory accountability, weak governance and portfolio divergence between model, adviser and client portfolio. The likes of Morningstar have started to track the performance of MPS, just as MPS provider, Fundhouse, has started to issue interrogating research on multi-asset fund performance. Comparability then remains binary but this will improve as enhanced research originates from the likes of Scopic. 

Tomorrow, the regulatory arbitrage MPS has enjoyed will likely narrow. The FCA has more recently started to increase focus on MPS with its “Dear CEO” letter and MPS questionnaire. Tick tock goes the consumer duty clock. MPS fees are clearly in the cross hairs for the FCA and was something I was particularly tough on during my time at Lloyds. This is complicated by the conflation between advice fee and MPS fee. The other key issue is one of excessive model churn versus zombie portfolios, noting either too little or too much switching is generally going to come under scrutiny.

Arguably the FCA’s direction favours larger structures over small firms. I have seen many back-of-the-cornflake-packet propositions in my time and suspect many of these will need to exit, evolve or consolidate. Multi-asset fund teams have the technical and technology advantage over smaller MPS providers and this should raise standards. Whether that improves outcomes or merely raises complexity and cost is a moot point for advisers. Here, MPS providers should also look back at the FCA’s 2020 guidance on portfolio tools. It’s worth saying that none of which should introduce anything new for an established multi-asset manager.

Tomorrow, technology platforms and workplace providers remain the enablers for MPS. The lines between fund managers, platforms and advisors will continue to blur as market consolidation and asset scale remain key to success.  

Tomorrow, any post-electoral changes to the tax regime could easily tip the balance from MPS in favour of MAFs or back the other way.

Tomorrow, in the new Multiverse, MPS may need to finally evolve beyond that rudimentary model I started 25 years ago, to compete head-on with multi-asset funds. Indeed, tomorrow MPS and MAFs may give rise to new hybrid solutions to support advisers.

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